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The key driving force of the worldwide storage devices market is its increasing use in mobile devices that have now higher memory capacities. Rampant growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals have compelled several companies to turn to storage devices vendors. This represents significant growth opportunity for the industry players.

As consumers’ dependence on cloud for storage purpose increases, a proportionate rise in demand for cloud-dedicated data centers is inevitable. Also, with simultaneous increase in data volumes, demand for cloud-based storage systems in data centers is likely to grow significantly.

Extensive implementations of CRM solutions, increased Internet and mobile penetration, rapidly growing media and regulatory compliance have resulted in data explosion for enterprises. Now, these enterprises are realizing the importance of storing information which, in turn should favor growth.

While the stocks in this industry have collectively gained 27.5%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 12.5% and 19.2%, respectively.

The secular growth of digital data and higher demand for storage especially for SSDs, contributed to the performance of both the sector and the S&P 500.

Sector Stocks Trading Cheap

Owing to the strong fundamentals of the industry over the past year, the valuation looks attractive. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Computer – Storage Devices stocks because their earnings are effective in gauging performance.

Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.

This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher will be the value of the stock.

The industry currently has a trailing 12-month P/E ratio of 11.58, near the lowest level over the past year and below the median level of 12.15. Clearly, there is plenty of upside left.

The space also looks quite inexpensive when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 19.9 and the median level is 20.17.

Outperformance to Continue on Robust Earnings Outlook

Robust market adoption of cloud computing, big data, IoT, auto, connected devices, VR, and AI will continue to drive the industry and have encouraged many companies to raise their projections for the current fiscal year. This optimism is likely to help Computer – Storage Devices stocks generate positive shareholder returns in the near future.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The earlier valuation discussion shows that market participants have been willing to pay up for these stocks already, potentially limiting further upside from current levels.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and its aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

This becomes even clearer when we focus on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $4.70 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Computer – Storage Devices industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018, but how this estimate has evolved recently.

The consensus earnings per share estimate for the Zacks Computer – Storage Devices industry reflects solid year-over-year improvement.Moreover, the trend in earnings estimates revisions have been favorable of late.

Looking at the aggregate earnings estimate revisions, it appears that sell-side analysts are gaining confidence in this group’s earnings potential.

The consensus EPS estimate for the current fiscal year has been revised 7.8% upward since Mar 31, 2018.

Zacks Industry Rank Indicates Robust Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.

The Zacks Computer – Storage Devices industry currently carries a Zacks Industry Rank #17, which places it at the top 7% of more than 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has continuously improved over the past five weeks.

Computer – Storage Devices Stocks Promise Long-Term Growth

The long-term prospects for the industry are alluring. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Computer – Storage Devices industry appears promising. The group’s mean estimate of long-term EPS growth rate has shown signs of improvement since mid-April 2018 to reach the current level of 15.25%. This compares to 9.8% for the Zacks S&P 500 composite.

Moreover, the growing demand of data storage, information security, virtualization, analytics and cloud computing to store, manage, protect, and analyze data are some of the incredible business drivers. These factors are expected to drive growth in top line that has gained significant momentum since the end of 2016. In fact, the basis of this long-terms EPS growth could be another reason for the steady top line growth that the Zacks Computer – Storage Devices industry has witnessed since 2016.

Moreover, another indication of solid long-term prospects is the improvement in the group’s gross margin.

Bottom Line

This is a great place to invest in right now, both with respect to the near term and the longer term. Factors like an improving unit revenue scenario, increased demand for connected devices, cheap valuation and growing need for improved data storage to eliminating data portability issues are positives for the sector and might contribute to long-term growth.

Keeping these factors in mind, investors may look for some good entry points in the stocks that will help them make the most of the momentum in the industry.

Here, we list three stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

NetApp, Inc. (NTAP - Free Report) : The company has been seeing positive revisions in earnings estimates over the last 60 days. Analysts have revised estimates upward by 2% for the current year. Further, the Zacks Rank #1 stock has surged 100.1% in a year.

Super Micro Computer, Inc. The company has been seeing positive revisions in earnings estimates over the last 60 days. Analysts have revised estimates upward by 2.7% for the current year. Further, the Zacks Rank #1 stock has surged 0.4% in a year.

Seagate Technology PLC (STX - Free Report) : The consensus EPS estimate for this hard disk drives (HDDs) manufacturer company has moved 0.9% higher for the current year over the last 60 days. The Zacks Rank #2 stock has rallied 49.3% over the past year.

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